Explaining Why Federal Deficits Are Needed

Yves here. To this useful post, I wanted to add a comment from Clive about one of the favorite deficit scaremonger arguments, which he recently debunked in comments:

I wish I had a pound for each time I heard an asset holder (it is usually someone discussing a retirement fund but you can easily find a similar response from someone exposed to residential real estate) defending some perfectly idiotic policy response on the basis that it would “help their pension”. I wish it, because if I had, I’d probably have enough to bail out the entire system.

It cannot be stated often enough (please everyone, tell your friends as often as they’ll put up with it): All pensions are residual claims on future prosperity. Wrecking the present, such as:

* by degrading the installed asset base in areas like transport, power or potable water supply and distribution
* by neglecting health and social care services
* by crapifying education
* by tolerating unemployment, especially youth unemployment

… is lowering the baseline for prosperity in the present which means a lower base to draw on in the future. These are not potential, theoretical problems which might emerge in the future; they are happening today. They represent legitimate areas where state intervention is perfectly justified.

I am not a disinterested party here. I am long on both financial asset and residential real estate exposure. These are judged by the people who manage my fund the least-worst asset classes for long-term investment — I have limited (virtually zero) influence over their strategies for investment. I fully expect these assets to be subject to write downs with the knock-on effect to the returns I have been promised in retirement. Not exactly a prospect that thrills me, especially as I have limited options to reduce my exposure. But the alternative to the current approach — which is being pursued by every government and central bank out there — and writing down unsustainable valuations is as the piece points out The Great Depression II.

While deficit terrorism precludes state action which would limit the damage, the persistence of policies which make a sudden stop (disorderly defaults and massive dislocations) far more likely is enabled. In short, it gets worse the longer it goes on for.

I continue to wait for sanity to arrive, but I’m not exactly holding my breath.

By Thornton (Tip) Parker. Originally published at New Economic Perspectives

Most MMT advocates probably took months to get comfortable with it.  But like a personal computer, one need not understand its innards to use its power.  The great power of MMT is its lesson that the federal government can create new dollars by running deficits to do things that should be done.  But the lesson is counterintuitive and will be rejected by voters unless it can be explained convincingly in a few minutes.  This paper offers five nuggets for explaining it quickly. NEP readers are asked to suggest ways to make the explanation simpler and better.

*   *   *   *   * 

Most Americans believe the federal government is like a family or business that must live within its income.  On the surface, that makes sense and the reasons why it is wrong are complex.  Here are five nuggets, or simple ways to explain why it is wrong to voters who will never be economists.  They show why federal deficits are necessary.  They can be adapted and used as appropriate.


Federal deficits are necessary and the government normally runs them.  It ran them during 129 of the past 200 years or nearly two thirds of the time.  During the other third, it ran surpluses to reduce its debt during five periods of six or more years.  Each period led to a major depression.

1823-1836: Federal debt reduced 99%  – depression began 1837.
1852-1857:        ”         ”         ”       59%  –        ”              ”      1857.
1867-1873:        ”         ”         ”       27%  –        ”              ”      1873.
1880-1893:        ”         ”         ”       57%  –        ”              ”      1893.
1920-1930:        ”         ”         ”       36%  –        ”              ”      1929.

The government had to run deficits to recover from each depression.

The Federal government is different

The economy needs a continuing influx of new dollars to grow.  The government creates new dollars when it runs deficits by spending more than it receives from taxes.

When the government collects taxes it takes dollars out of the economy.  It also appears to take dollars from the economy when it sells bonds.  But unlike taxpayers who lose their purchasing power, bond buyers get bonds and keep their purchasing power.  The deficit spending adds new dollars to the economy as if they had been “printed”.  Note these key points:

  1. Unlike reluctant taxpayers, bond buyers want the bonds to use as savings accounts to safeguard their dollars and earn interest.
  2. The government redeems the bonds when they come due, but it can roll over or sell replacements indefinitely.
  3. The total of all dollars the federal government has created this way since 1790 is called the federal debt which never has to be repaid while the nation exists. Attempts to reduce the debt significantly never worked because they took dollars from the economy that it needs to operate and grow.
  4. Because the government can create dollars, it can never run out of them and cannot be forced into bankruptcy.
  5. The federal government is not like families or companies because only it creates new dollars that stay in the economy unless it removes them by running surpluses.

This explanation is generally correct, but the details of how the government creates new dollars are more complicated.

Economic Sectoral Balances

Most people have heard of the private sector but they don’t know what “sector” means.  The economy has three major parts called the private sector, the public sector, and the foreign sector.  The total dollar flows from all buying and selling within and among the sectors always cancel out or add up to zero.  A sector has a deficit if it spends more than its income.  When this happens, one or both of the other sectors must run a corresponding surplus, and vice versa.

Since the 1970s, the private sector has bought more goods and services from other countries than it sold to them.  The dollars that flowed to other countries to pay for the net imports were foreign sector surpluses and private sector deficits.

Those deficits drained dollars from the private sector and the economy might have slowed down or even fallen into a depression for a lack of money.  That did not happen because the federal government in the public sector ran deficits that replaced the dollars sent abroad.  The country now imports about one half a trillion dollars worth of goods and services a year more than its exports.  That flow will have to be reduced eventually or the economy will become weaker and even more unbalanced.  But until that happens, the government is trapped into running deficits to compensate for the private sector’s failure to earn its living in relation to the foreign sector.  Balanced federal budgets are formulas for economic decline.

 Drive the Economy

The economy is like a car.  Government spending is the accelerator.  Taxes are the brakes.  To keep going or speed up, press the accelerator.  To slow down, ease off the accelerator or press the brakes.  Driving too fast could lead to hyper-inflation, but that never happened here because the country always slowed down in time.

Reverse the Discussion

Those who oppose federal deficits should be made to answer two basic questions:

  1. Why should the government avoid spending to meet the country’s critical needs in order to save dollars which it can create?
  2. How could the government ever run out of dollars since it can create them by running deficits?

There are no good answers to those questions.

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  1. mark sullivan

    Matter cannot be created nor destroyed. To answer question one- all governments which control and manipulate the quantity of currency practice inflation. The stealth tax. Every American has been subject to this tax. The more deficits and the more printing- the more valueless the dollar and its buying power become. A 2 dollar steak in 1974 now costs 12 dollars. So it’s really nothing other than an additional tax which they use to steal from the citizens.

    Question 2. The government will eventually completely destroy the dollar as it’s buying power reaches nil. As a fiat currency, 6000 years of history has taught us that it will fail- 100% of the time. Only God knows when that will happen but it surely will.

    1. Chewitup

      What was your net worth in1974? What is it now? Have you benefitted from the inflation tax over the last 42 years? How has your standard of living changed since 1974? Is your house nicer? Does your car perform better? Do you find it easier to access information? Music? Movies? Food? Wine? Do you travel more?
      Are any of these things available to purchase with gold?

    2. bob

      “Matter cannot be created nor destroyed”

      And some prefer cucumbers better pickled.

      Did you actually read the post? Or did you just use it as a chance to play seer?

      “Only God knows when that will happen but it surely will.”

      A prophet in our midst.

      1. Synoia

        Matter cannot be created nor destroyed.

        Yes that was the conventional wisdom up to a stunning demonstration in 1945.

        The US abandoned the gold standard in the 70s.

        Mark, you understanding seems to predate both of these events. Do you also believe the Solar System is Geocentric? Would a little reading of the history of the 20th Century would prepare you to better understand the issues of the 21st Century?

        1. Deloss Brown

          Begging your pardon, Synoia, but what was horrifically demonstrated in 1945 was not that matter could be destroyed, but that it could be changed into energy according to the equation

          e= mc^2

          –where m is the mass involved, c is the speed of light, and e is the energy released.

          Aside from this nit-picking qualification, I am likewise annoyed at Mark Sullivan’s ideological, no-evidence statements. I agree with the Thornton Parker post, and with Mark Sullivan’s critics.

          1. Mark Sullivan

            So let me rebutt this thread a little by reminding you people of a few things.

            In 1974, only my father worked- my mother raised kids. We were able to do that and still own two cars and a house on one income. My father’s salary was nothing exceptional about 10k. To achieve the same standard of living my wife and I must make 100k. Our labor has also doubled plus 10 to 15 hrs extra every week.

            Imagine that for a year’s worth of labor- we make 100k. A central bank can print that same 100k in one hour and introduce it into the system. Wouldn’t you love to simply print yourself into prosperity and not work at all? In other words- a central bank can literally steal all of your annual work efforts by simply counterfeiting the paper you were paid with. Not such a good deal for us.

            My net worth is approximately the same as my fathers was plus 2.5x the hours worked and education costs.

            In the end, paper will revert to it’s intrinsic value. The end I believe will not come in some Weimar event- our treasury interest will simply overwhelm our ability to service it as the government attempts to sweep every last crumb off the table.

            I snipped this from Rogoff and Reinhart on wiki* sees you rolling your eyes

            Their calculations demonstrated that high debt countries grew at 2.2 percent, rather than the −0.1 percent figure initially cited by Reinhart and Rogoff.[9] Rogoff and Reinhardt claimed that their fundamental conclusions were accurate after correcting the coding errors detected by their critics.[10][11] They further disavowed the claim frequently attributed to them that a 90% government debt to GDP ratio is a specific tipping point for growth outcomes.[12] Further papers by Rogoff and Reinhart,[13] and the International Monetary Fund,[14] which were not found to contain similar errors, reached conclusions similar to the initial paper.

            Rogoff and Reinhart initially stated that once those 90% debt levels were achieved- it was essentially game over. Those economies dwindle and die. History tells the same story but I’m hoping you critics will not require me to cite those instances.

            I was in awe as I read this thread- not because you don’t make a few points which many of you do even though I found several of the points rather relative and specious- it was the mean spirited way in which they were delivered.

            I once had a man ask me, “why do people find it necessary to run others down?” Because oddly he said, it makes them feel superior about themselves if they can make others feel diminished.

            So I got that.

            1. Yves Smith Post author

              You are really behind the times. That Reinhardt and Rogoff paper has been debunked as rife with spreadsheet errors. No one refers to it any more. In addition, the IMF’s head of research has conceded that austerity does not work, that “fiscal multipliers are greater than one” which means running a deficit results in an even greater increase in GDP, reducing the debt to GDP ratio.

              1. Mark Sullivan

                The paper was critiqued. I was unaware that any conclusions had been drawn or achieved other than the usual disputing that takes place within the dismal science or any new idea or observation that appears proprietary and does not seek to conform to the current herd mentality. I will certainly read any link that definitively debunks the theory- if you have one- while I view supporting evidence such as the 0.5 4th quarter GDP print.

                Austerity doesn’t work- because austerity is a condition brought about government (and bankers) which after creating a problem- seeks to solve the original problem by creating a secondary problem.

                Lastly Yves, I don’t know of anyone anywhere who believes you solve a debt problem by acquiring more debt. Maybe Krugman and the 1 trillion dollar coin crowd.

                I have a solution for our dwindling GDP which will continue to dwindle as we try to service that vast debt load.

                Our government simply needs to pass another law like Obamacare- wherein we are all compelled to buy homes and cars through the force of law- which will then have the stimulative effect of raising GDP like a moonshot and allowing us all to declare victory and feel good about ourselves.

                I enjoy your writing. I got your point mostly. Thanks for your reply.

                1. I. Davis

                  That paper you based your argument on contained serious, material, elementary calculation errors. (“Spreadsheet error”, euphemistically.)

                  With the error corrected, the data does not show what the paper claimed originally.

                  What you fail to acknowledge is that money is not yellow metal dug out at great expense anymore, it is a formalized construct of society, just like laws, contracts and other promises.

    3. Synoia

      The US is the ONLY Sovereign Currency Issuer, because all others with trade deficits need dollars for trade, and their debt has to be settled in in dollars, not in their Sovereign currency.

      Hence Empire.

      1. James Levy

        I’m not completely positive that at the BIS you can’t use Special Drawing Rights and Gold to settle accounts. I also think that both Russia and China run some bilateral trade between themselves and with other states via what amounts to barter. Not saying you are wrong, but I think it’s a little more complicated than you present.

    4. RabidGandhi

      This “inflation: the stealth tax” line is a blaring testament to the effectiveness of economics mis-education.

      To wit: if in 1950 I only needed one dollar to buy a thermosful of gravy, and now need six dollars to buy the same product, yet at the same time I earn seven times as many dollars per hour of work, how is that a tax? More succinctly: it’s not the number of zeros on the bill that matter, it’s how much labour do I need to buy my thermos.

      The mere fact that the internet is spewed with folks munching their nails raw in fear of inflation despite the clear deflationary environment the US and Europe is a clear sign of the coming of President Camacho.

      1. washunate

        Agreed, the focus should be on labor. That’s what is wrong with our system. Median wages diverged from productivity growth decades ago.

        That’s how inflation has been a stealth tax. The productive gains of the economy are being systematically looted by connected insiders. The typical worker has to work more hours than they ought to have to work in order to maintain a decent standard of living.

        1. RabidGandhi

          Sorry to nitpick, because it seems we agree, but just because it is hugely misunderstood (even by many here on this site), I want to drive home the point.

          The problem is not inflation. Inflation is part of the way an economy works. If you are in a motorboat on a river that is going upstream slower than the current, the current is the problem you face, but what you need to do to overcome it is check your motor. Ie, the problem is not how fast you go, or how fast the current is. It’s how fast you go vs. the current.

          Likewise, saying “workers’ earnings are being eroded by inflation” only paints part of the picture. By shifting the focus to inflation instead of employers’ refusal to pay employees a wage adjusted to the cost of living, capital has successfully diverted the debate from something that is 100% their fault to making it an issue that can be “solved” by further harming the working class: less deficit spending, depressing aggregate demand, and tightening monetary policy.

          1. washunate

            Agreed, overall I think we are on the same page. But I would point these things out:

            1) the capital vs. labor divide is irrelevant
            2) a current is a natural phenomenon; public policy driving up prices is not
            3) in your scenario, capital has already won(!) you are merely asking for cost of living. You forgot productivity.
            4) you are describing an era of scarcity. We live in a time of abundance. There is plenty of aggregate demand; the issue is one of distribution.

            That’s why the focus should be on labor, not deficit spending. It’s the outcome that matters: how much do people have to work. Aggregates get very confusing very quickly because there is no link between making the pie bigger and helping households in need. Unless one subscribes to trickle down economics, I suppose.

    5. Higgs Boson

      How much of the increase in the price of that steak is due to the cost of feed, the cost of the land on which the cattle are raised, the cost of transporting the cattle to slaughter and subsequently to the local Piggly Wiggly, etc. Aren’t all of those costs subject to the vagaries of “the market”?

      Aside from that, one of the reasons we have the current fiat currency system is because under a gold standard, the money supply is limited by the physical quantity of gold. If you have 100 billion oz of gold stored in Ft Knox, and set the exchange rate to 35 dollars to each oz, then you are physically limited to a money supply of $3.5T. The only way you get around that is to acquire more gold or devalue the currency, right? You can’t conjure more gold out of thin air. And since there is a real, physical limit to the amount of gold that exists, if you acquire more gold, you have to get it from somebody else.

      If I buy imported goods using a gold-backed currency, that money leaves the country. The foreign agents who have my dollars can exchange them for gold. Then the cache of gold in Ft Knox is diminished, right? So the gov would have to increase taxes to drain enough currency from circulation to keep the number of outstanding dollars “balanced” at $35 to an oz, or devalue the currency (make the exchange rate $36 to an oz, for example), right?

      You suggesting that the gov should impose tariffs on imports to prevent such a situation? If not, then what should they do? Do you advocate free trade? How do you reconcile that with a gold standard?

      1. Jerry Hamrick

        Be like Einstein, conduct a thought experiment. Imagine that we were in charge of our government at the beginning of the Great Depression. Imagine that we were on the gold standard. Imagine that on our first day in office we were told that it had been discovered that the Rocky Mountains were made of pure gold. Calculations had determined that we had an unlimited amount of money. We had endless trillions and trillions of dollars worth of pure gold. What happens then?

        1. Higgs Boson

          Who owns the Rocky Mountains? Most of it is federally owned land. The gov could keep most of it in the ground, extracting it only when it needs to increase the money supply. And even if you extract it from the mountains, you do not necessarily have to print currency. You could just store it. The problem is when you have a scarcity of it.

          When you have a virtually unlimited supply of money, the decision to spend and what to spend it on are political decisions, not monetary ones.

          1. Jerry Hamrick

            My thought experiment includes the idea that we have an unlimited supply of money; “endless trillions and trillions of dollars worth pure gold.”

            I take your reply to mean that we do have a scarcity of money today. And I take your reply to mean that monetary decisions are not political decisions. In that case who is running the show? How do they prevent politics from influencing their decisions?
            If we do, isn’t it created by a cascade of political decisions?

            My thought experiment puts us in charge, so how would you use this unlimited supply of money?

            1. Higgs Boson

              We do NOT have a real money scarcity. The only way it can be scarce is that the issuer of the money (i.e. the federal government) chooses to make it so.

              The treasury is required by law to collect taxes (“revenue”) and issue debt to offset the amount of money it spends per Title 31, USC Sections 3101 through 3113. We frequently hear MMTers tell us that the government’s power to tax is what gives money its value. I would add to that that issuing debt also does that.

              This explanation of Federal Reserve Notes is interesting:

              Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

              Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything This has been the case since 1933. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are “backed” by all the goods and services in the economy.

              When the government spends, it is creating money whether it is physically issuing notes or electronically marking up accounts. Issuing debt is the equivalent of stocking more gold into the fortress (from our thought experiment).

              The only limit to how much money the government can create (spend) is the availability of things (goods) and services to buy. Given that, the decision to spend, and what to spend it on are in fact political decisions that flow from national policy goals. What do we want to accomplish? Are those goals beneficial? To whom? Do we build schools? Do we overthrow democratically elected popular governments? Do we build bridges? Do we build weapons we tell everyone we hope we’ll never use?

              All money is debt. It does not matter if it is a piece of paper that is backed by physical gold or backed by “all the goods and services in the economy”. It is a store of demand; a promise to exchange this store of demand for a real thing or service. Otherwise, you’d have to carry physical gold around with you.

            2. susan the other

              this is the question. because money is worth only what you spend it on. so that: if a “government’ decides to deficit spend for an extreme social good/necessity it makes money worth more!!!! really??? how does that work? People are scrounging out an existence. They all have dysentery. They can’t get up off their couch. They’ve ruined all their shoes. So they finally decide to eradicate dysentery. And they spend their energy (same as their ‘money’) on a good sewage system and some herbal remedies…. and dysentery is cut by 99%. Good investment. So they next look at their central bank and realize the CB is screwing them by a fixation on the ‘value of money’ (which doesn’t exist – the only ‘value’ that exists is their own will to improve their lives…) so that any crappy-assed speculation by the banksters can profit. So they get rid of the speculators. Good precaution. And the economy improves even tho’ their ‘money’ has no intrinsic value. And etc. The road to wealth. Is what you spend your time on fixing and creating.

            3. Higgs Boson

              This is in response to Jerry Hamrick, February 4, 2016 at 9:12 am. For some reason my comments won’t post in the thread.

              We do NOT have a real money scarcity. The only way it can be scarce is that the issuer of the money (i.e. the federal government) chooses to make it so.

              The treasury is required by law to collect taxes (“revenue”) and issue debt to offset the amount of money it spends per Title 31, USC Sections 3101 through 3113. We frequently hear MMTers tell us that the government’s power to tax is what gives money its value. I would add to that that issuing debt also does that.

              This explanation of Federal Reserve Notes is interesting:

              Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

              Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything This has been the case since 1933. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are “backed” by all the goods and services in the economy.

              When the government spends, it is creating money whether it is physically issuing notes or electronically marking up accounts. Issuing debt is the equivalent of stocking more gold into the fortress (from our thought experiment).

              The only limit to how much money the government can create (spend) is the availability of things (goods) and services to buy. Given that, the decision to spend, and what to spend it on are in fact political decisions that flow from national policy goals. What do we want to accomplish? Are those goals beneficial? To whom? Do we build schools? Do we overthrow democratically elected popular governments? Do we build bridges? Do we build weapons we tell everyone we hope we’ll never use?

              All money is debt. It does not matter if it is a piece of paper that is backed by physical gold or backed by “all the goods and services in the economy”. It is a store of demand; a promise to exchange this store of demand for a real thing or service. Otherwise, you’d have to carry physical gold around with you.

    6. Benedict@Large

      (1) Nonsense. Most inflation comes from the supply side. Asset bubbles. Cartelization. ALL inflation is always blamed on the demand side. Like in this explanation. That lets the rich off the hook. To keep creating asset bubbles and cartels.

      (2) Hyperinflation is almost always caused by a currency producer borrowing in a foreign currency (or incurring compensatory war debt, same thing) in excess of its ability to pay that debt off. Zimbabwe and post-WWI are the prime examples referred to, and each suffered this fate.

      In any case, the suggestion that the currency might deflate (to zero) SOMEDAY is always used as an excuse to cut back TODAY, even though no rationale beyond that someday is ever given. This is tantamount to saying let’s screw ourselves today, because we certainly will someday. Let’s starve old people today because if we don’t we’ll have to starve them SOMEDAY. Let’s let our schools rot today, because otherwise we’ll have to let them rot SOMEDAY. The list can go on and on. It just looks more ridiculous as it goes, Except it you’re rich and have everything you need, and your only concern is that things be that way for you for as long as possible.

      1. RabidGandhi


        The same bogeymen always trotted out to keep the rabble in line.

      2. washunate

        The supply side? As in…the government supplying dollars to rich people that makes basic needs like housing, healthcare, and healthy food more expensive for the majority of citizens?

    7. Jerry Denim

      Some of the things you say are true others simply are not. About the only thing you say that can’t be disputed is un-inflation adjusted steak costs more now than it did in 1974, but that would be true about almost everything. I can think of a few items that I can buy cheaper now than I could twenty years ago or more, but I digress. Surely you realize macro-economics isn’t so simple and absolute. I would like to hear how you would explain the current situation of Japan with your classical Econ 101 dogma. Japan has been the most aggressive currency diluter (quantitative easer) of any advanced country, they have aggressively deficit spent for decades, they have racked up a government debt to GDP ratio of over 250% and yet they are fighting DEFLATION not inflation as your axioms would demand. They are also enjoying a stable and relatively prosperous society with extremely low yields on long-term government debt.

      You can not explain the real world reality of Japan within the your frame work of your classical ‘more money = more inflation’ theory/model. Simple monetarist theories of macro economics are bunk because they fail to explain the real world.

    8. digi_owl

      Here is a little brain tease from you. Private banking extending credit is one hell of a source of inflation…

  2. Will

    Interesting points. I’d add another nugget to indicate the relationship between deficit spending and inflation/deflation. Something like:

    “When government deficit spends and creates something of more value than it spends (what corporations would call ‘profit’), we don’t see any inflation at all. If the US gov’t deficit spends $1,000,000 on enforcing environmental regulations on energy companies which lead to $10,000,000 less in health costs, lost farmland productivity, etc, then we’d see no inflation. Only when the gov’t spends money on corrupt, worthless, or low-value projects, such as wars of choice or bailing out banks, do we see inflation as the result of gov’t spending.”

        1. RabidGandhi

          And inflation is still 0 to negative? I say punish them with austerity until they go out and shop.

          (either that or Will’s inflation theory needs some reworking)

  3. Synoia

    Bonds are considered interest bearing accounts in MMT, Government Bonds are readily exchanged for money, and thus fungible.

  4. dk

    I don’t “oppose federal deficits”, but this article ignores many relevant issues, and dumbs down the entire scenario. Deficit government spending is one tool among many, it certainly doesn’t fix anything by itself.

    1 – When government routs its spending towards con artists who claim that they are in critical need or are addressing such needs, when they aren’t, government (and everybody else) needs to grow a brain cell or 20. And use them, too.

    2 – If the dollars don’t circulate throughout the economy, increasing their quantity doesn’t do much good. Also, having some concept of proportion (other than infinity) helps recognition, analysis, and possibly even (gasp!) remedies of problems occurring in the system.

    “Deficit” is a horrible term in the first place, and obviously a source of confusion, and when it’s prospective, it shouldn’t be called “spending” either. Maybe a term like “token initiation” would help people to focus on where the dollars are going instead of where they’re coming from.

    1. Chewitup

      The point is that deficits are needed, not necessarily how they’re applied. Demand leakages require the government sector to make up the difference in order for the economy to grow. Dollars going to foreigners and into savings accounts are not in “circulation” as you put it. Appropriation of deficits are the responsibility of our fine elected representatives.
      Government can spend on anything for sale in dollars, or it can tax less to add more dollars into the economy. Which method circulates dollars more? There’s your policy debate.
      Or we could ask the private sector to borrow dollars to keep the economy going. As long as there are real assets to collateralize the borrowing, that works too. Until it doesn’t.

      Vote according to your favorite way to game the system.

      1. dk

        Okay, I’m disagreeing on specifics. Agreed, and no question: deficits are a vital part of the engine. But if we stipulate that their application doesn’t matter, we lose a way to promote their benefits and inhibit their abuse.

        Dollars going to foreigners and into savings accounts are not in “circulation” as you put it.

        Not until they’re spent (somehow). And if they are never spent, that is a problem. And if they accumulate to large volumes and then get “circulated” in a sudden flood, that is a problem too. And when people say that that has nothing to do with the way they got the currency if they got it though deficit creation, I’m saying that’s irresponsibly obtuse.

        Which method circulates dollars more? There’s your policy debate.

        No, not mine; I like ’em all in proportion to circumstances. The argument that one is inherently superior to another, or that one will solve everything, is what I’m objecting too; they’re both wrong when they assert exclusive and/or universal absolutes.

      2. Jerry Denim

        “Government can spend on anything for sale in dollars, or it can tax less to add more dollars into the economy. Which method circulates dollars more? There’s your policy debate”

        That’s an easy one. Tax cuts for the poor and middle class will juice the economy more than pure government spending, IF they’re not choking on personal debt, which most Americans are. Lots of money to lots of people will infuse the economy in a much more efficient fashion than large scale government programs where the money will not be as well distributed. Tax cuts for the wealthy is next to worthless for stimulating growth because they have so much disposable income if there is something they want they have probably purchased it already. If the ultra rich choose to buy much anyway with their tax cuts it will tend to be less valuable to the broader domestic economy like a Swiss watch or a Tuscan villa. Not as much domestic bang as several million dollars worth of dinners at cheap local restaurants.

  5. jefe

    Dick Cheney says, “Deficits don’t matter”

    He also told Pat Leahy to go f*ck himself, and peppered a crony with bird shot, but I digress.

    The fly in the ointment — picking your universally embraced favorite winner– who gets the gravy?
    Deficits appear to not matter when it comes to doubling down on escalation of Moar War– presently in Syria, Afghiranipakiraqistan– we’ll see who is next on the slate later…
    Deficit spending on US infrastructure, subsidized low-interest student loans, US funded Basic Research- seem to be notions that get no traction in congress.
    Get folks to agree on where its OK to spend- or anything at all these days— tough slogging.

    As for me, the answer to whether my standard of living has kept pace with the inflation tax of devalued dollars, it is a resounding Hell No! I am in the global race to the bottom, and appear to be winning while whining.

    Last year was the Year of the Turd. Recovery ™ ghosted past our door.

    Deficit spending, dollar printing, both contain an element of implied trickle down… akin to lowered tax rates on ‘the other side’. My experience is that there is a paucity of peanuts for the rabble either way, and the bubble is gravitationally drawn and aggregates to the largest masses of money…

    Compare the Digital TV purchasing $600 check Bush 2 authorized post 911, versus the Hank Paulson legal tablet panic $750 billion to the few, the proud, the…

    There is a timeless old saw, And the Rich get Richer…

    Just an enraptured Tax Mule eatin’ cake on the high plains


  6. Bobbo

    “The economy needs a continuing influx of new dollars to grow.”

    Ah, but what if growth is not a permanent feature of the system? What if finite limits are pushing the aggregate of the world economy to a steady state? To which all of the Keynesians reply in unison: “Because growth.”

    Can we conceive of an economy and a monetary system that does not require perpetual growth? Can we? In all seriousness, except for those who see gold occupying a key role in the system, I think the answer is no.

    1. Adam1

      Even with a zero growth environment you would likely need new money/dollars flowing into the system most of the time. History shows that over time the private sector prefers to net save (financial assets) more than it invests. That leakage of money requires and injection of new money just to keep you at zero.

      1. washunate

        What history shows is that government undertaxes the rich. The reason that new currency units must flow is that the purpose of the system is to entrench inequality.

        Take away the goal of inequality and you remove those kinds of artificial needs.

    2. jabawocky

      we need growth as long as money is created by interest-bearing means (growth in debt can pay back previous interest without causing deflation), and as long as the population size is increasing.

    3. washunate

      Can we conceive of an economy and a monetary system that does not require perpetual growth?

      Right on. To me, it’s all in how one defines growth. Economics has become dominated by people obsessed with money in and of itself (as defined as currency units) rather than money as simply a mental construct for how we want to allocate human labor, i.e., our time in this universe. There is a limit to that kind of materialistic growth because it requires competent governance to administer the system which just isn’t compatible with concentration of wealth and power over long periods of time. It requires forcing people to leave what they love to ‘go to work’ rather than empowering people to do what they love better.

      But if we value other things – justice, equality, leisure time, family, the natural world, scientific exploration, art, etc. – then we can achieve growth defined in those areas for a very long time. A stable system, over long periods of time, requires everyone having a stake.

          1. washunate

            Wait, have I been spelling it wrong? I thought it got settled on groaf. Or maybe I’m behind on my lingo!

  7. craazyboy

    At least we found out MMT began in 1823. Maybe over the next 300 years they’ll recover lost econ and finance truths and finally get the details worked out correctly..

    1. Jim Haygood

      ‘The government had to run deficits to recover from each depression.’ — Tip Parker

      One reason MMT didn’t occur to anybody in 1823, or even 1923, is that federal spending accounted for only 3 to 5% of U.S. GDP until Frank Roosevelt supersized it starting in 1933.

      That is, surpluses and deficits run by a barebones (some would call it “constitutional”) federal government with no income tax and no direct-to-consumer social benefit programs were simply too small — typically much less than 1% of GDP — to have the grand effects attributed to them by those who imagine that government was always as majestic and all-pervasive as the insolvent Leviathan that we all know and love today.

      1. craazyman

        people have a lot of imagination. I think even animals do! I’ve watched a cat twitch and shiver while asleep and I can only imagine the birds and mice parading through its mind.

        Clive it sounds like you have a lot more money than any of us thought. A fund and “residential real estate exposure”? Wow. When people use the word “exposure” in a financial context that usually means “lots and lots of money”. Most of us just have money in a checking account. Nowdays we learn that’s not our money, it’s the banks money. They just owe it back to us if they feel like it. But if they don’t feel like it, well, our bad luck. Sort of anyway.

        (I’m just ribbing you since you rib me! All in good fun, that’s how I take it, since it is funny when you rib me and I do get a good laugh when you barb my alma mater, the U. Magonia. You’ve evidently never visited our grounds and seen our buildings. They look like something from another world. I’m not kidding!).

        I have some deep thoughts about this whole MMT thing but I’m too lazy now to type them out. Here’s the “money quote” no pun intended. Public money is created by commitee. Private money is created by an individual. Each form of creation has consequences for the phenomenon of the money system. These consequences are not trivial and relate to many aspects of group psychology and analysis of psyche. That in turn was largely the domain of either 20th century psychoanalyts who wrote books, crowd psychology theorists (like LeBon, Freud and McKay) along with anthropologists who study non-Western cultures and draw analogies between our rituals and theirs. There’s a lot there if somebody knows it’s there, but if somebody study economics all their life and don’t know it’s there, then they don’t see the phenomenon of money in its entirey. That’s all I can type now.

        1. craazyboy

          The cat was probably dreaming of creating a can of cat food out of thin air! Cats don’t know anything about money. Cats would never assume a can opener either, so a human serf with can opener would appear just like in “I Dream of Genie”.

          Look forward to your next economic theory – there’s no such thing as too many – but I’m not sure if you are really discovering new ground taking the anthropologists view. We have shamens and witch doctors now running the field. That wouldn’t come as a new revelation. But I’ll keep an open mind and be patient.

        2. Clive

          (sigh) Yes, apologies, nearly 30 years taking the Queen’s Schilling working in finance has much to my chagrin not just rubbed off on me but, despite my best efforts soaked into my soul. You try to suppress it, but it seeps out, like lead in a Flint water supply, even though you wish it wouldn’t.

          Before you know it, you’re risk modelling whether or not it’s worth putting some more daffodil bulbs in the front border this spring and doing a cost/benefit analysis on your mother in law’s cat’s veterinary insurance policy. I’m the one who’s ended up driven crazy.

          I’ve got an article sitting in drafts about how joining the FIRE sector parallels something a bit like all those largely innocent but not really totally innocent kids who joined the Hitler Youth and what makes people become Stasi informers — and how those maybe a little less onerous moral slippery slopes (hmm… maybe they’re just as onerous…) apply if you try to stay on the right side of the thin ethics line all the while you work in finance. It must be putting me in a quandary because the words just don’t flow so I keep pecking at it without actually being able to get it right.

          A career change would be lovely but if you’re only good for the things you’ve always done, well, you’re a bit stuffed aren’t you. I sent my CV off to the University of Magonia but they wrote me back saying I was over qualified. And they couldn’t match my salary expectations. “C’est la Vie”.

          1. craazyman

            I hear ya, believe me Clive. We have more in common than you might suppose, even our industry, believe it or not. I make a lot of stuff up here and write it down, but it’s all true in a weird way — energetically as metaphor, but not necessarily in physical reality. Don’t give up on U. Magonia. It’s free and it’s mostly at the library or bookstore. There’s no tuition and no administration. It’s a very lean operation.

            When it comes to FIRE sector mind wash and related analysis of Hitler youth, Stasi, etc. that’s quite a challenging topic and I’m not surprised at the difficulty of articulation. The conceptual vocabulary is the hardest part, in my view. It’s like Renaissance perspective or Euclidean geometry or calculus or any incredibly lucid and powerful thought system: it’s very very hard to think of it the first time, but after somebody thinks of it and works it out and writes it down, it’s easy. But it’s not easy if nobody has. That’s where you’r a mountain climber without the ropes (not to be too florid of metaphor).

      2. James Levy

        Jim, no one in their right mind would want to go back to the conditions of the working class and the elderly before the government assumed some responsibility for their benefit. If you think the world was better before 1913 for average Americans when those two ‘evils’–the income tax and the Federal Reserve–came into being then I defy you to show me how.

  8. RabidGandhi

    Absolutely possible. But to argue that any current economy is anywhere near that ideal point– with the rampant need for infrastructure, universal health care and education– is patently daft.

  9. Jerry Hamrick

    How does taxation act as a brake? In other words, what are the conditions that would trigger the use of taxation as a brake? Are you talking about taxation at all levels? Are any levels exempt? Who decides when, who decides which taxes, who decides whom to tax? How effective are the brakes? Do they reverse adverse conditions in days, weeks, months, years, election cycles, decades, lifetimes?

    Why do we need taxes at all? Do we need them to fund government spending? If so, what exactly is the linkage?

    How does one take the nation’s foot off the brakes? How effective is this action? How quickly does the economy respond to braking? Who decides when and how hard and how long?

    Why do you refer to this brake-accelerator cycle as “deficit spending?” Doesn’t this term cause people to worry about deficits? Should we worry about deficits? Should we worry about the national debt?

    How likely is it that Congress will follow this brake-accelerator cycle in a timely way? Has it ever worked without a great deal of pain and suffering for the masses rather than the elites?

    What about equity? Who feels the most pain in economic downturns? Do we care more about the DJ average or the lives of ordinary Americans?

    Again, if our supply of money is unlimited then why use taxes at all?

    Your family metaphor is weak. Living within its income implies suffering on the part of the family. And, in a family, the supply of money should be used to benefit all of its members, but not so in our government. So, I think that because we have an unlimited supply of money then the family metaphor would apply. Our national family should use the unlimited supply of money to benefit all family members.

    The deficit spending metaphor has always favored the wealthy classes.

    Isn’t the most powerful brake of all unemployment? How can that help the masses? It can’t. It only helps the wealthy, if it helps anyone at all.

    Why can’t we use our unlimited supply of money to plan and implement worthwhile, non-inflationary projects, such as rebuilding our infrastructure, combating the onrushing catastrophe of global warming, building armaments, educating our children, making sure their brains are nourished from conception, giving each American access to money when they need it, in the amount they need, in the way that they need it so that they can do the things that will build a strong America in which all persons can build long lives worth living. These things include, good nourishment, health care, dental care, getting an education, buying a home, starting a family, starting a business, building a safe and comfortable retirement, etc. These would not be inflationary. This money should be distributed to the individual citizen is equal monthly installments from birth to death. One-third of the installment would be used to fund the things I just listed, two-thirds would be used to pay for the basic necessities of life.

    I think that if we have a truly unlimited supply of money, as the MMT theorists seem to think, then the use of taxation to manage the economy shows a definite lack of imagination.

    With an unlimited supply of money all one needs to do is slow spending, and that can be managed in ways that do not cause hardship on ordinary citizens. The wealthy do not suffer from increased taxes, but they do feel put upon. But the rest of us do feel the pain of increasing taxes. The wealthy feel no pain because they have the money to pay for the necessities of life. The ordinary citizen does not have the same protection. They lose their homes, their jobs, their savings–their lives are wrecked. Not so with the wealthy. But our unlimited supply of money makes it possible to protect the economic lives of innocents.

    Years ago, over a period of about eight years, I listened to several men who were veterans of WWII and the Great Depression talk about the way the Hoover government treated their parents. They compared that treatment to the way FDR responded to the Depression. These young men remembered their own anguish at watching the suffering of their parents, some remembered dropping out of school to get a little money, some remembered getting kicked out of their homes. They did not want their own children to witness such anguish. They thought that the government should have given money directly to these suffering families. They were right.

  10. DJP


    Couldn’t a government’s increase in spending drive its currency down (eventually drastically) and thus make it very hard to purchase external goods and services (developmental, business and consumer). It’s just something I’m trying to get clear in my head as I live in a country whose currency, being volatile at the best of times, is currently diving.


  11. washunate

    This post does not answer the headline. Yes, deficit spending can happen. No, deficit spending is not necessary. Progressive income taxation is another perfectly effective means of paying for valuable public spending.

    This focus on money as in the quantity of currency units is at the very heart of what is wrong with the car-obsessed, groaf-focused, materialistic paradigm of establishment economics. It is interesting that even when MMTers set out to argue for federal deficits, they don’t actually answer the real question.

    Namely, of course, that question is the distribution of resources. The problem is not that the private sector has insufficient resources in aggregate. Rather, the problem is the allocation of resources within the private sector, combined with a growing authoritarianism (fascism) in the public sector that deficit spending proponents routinely ignore. The author says that the federal government isn’t like a household. That’s right. The typical household doesn’t run the largest prison system on the planet domestically and the largest empire globally.

  12. washunate

    Or here’s a more empirical way of looking at the irrelevance of deficit spending. Over the past quarter century, we have net deficit spent trillions of dollars.

    During that time period, median household net worth – according to the government’s own numbers in 2013 dollars – has held roughly steady just above $80K. The average household net worth, however, has increased by more than 50%, from $342K to $528K(!).

    To those who say deficit spending is the answer in a reality-based worldview, what problem exactly are you trying to solve? The actual evidence, what has happened in real life, shows that deficit spending is positively correlated with increasing inequality in the Reagan-Obama era.

    1. MikeNY

      IMO this is correct. Deficit spending can be, but is not necessarily, a redistribution of wealth. It depends on what we use the money for and who gets it. It is devilishly difficult to get the money into the ‘right’ hands when an oligarchy becomes as deeply entrenched and powerful as ours is. Not that we shouldn’t try, somehow: redistribution is a matter of justice, and ultimately, of the survival of democracy.

      (I also believe the entrenchment of oligarchy is a big factor explaining why corporate profit margins have not (yet) mean-reverted. And the Fed, as usual, has served the oligarchs.)

      1. washunate

        Well said. Something that continues to intrigue me in the context of oligarchy is how deficit spending in theory is celebrated yet concrete budget proposals never accompany these types of posts.

        What exactly is all this money needed for if we’re not doing tax breaks for the rich and massive military spending and bank bailouts and bloat in healthcare and real estate and law and all the rest?

    2. Jim Haygood

      Japan has been running deficits in excess of 7 percent of GDP ever since the financial crisis of 2008. Chart:


      And they plan to keep doing it forever, depending on ZIRP to keep the debt service manageable as government debt soars to 300% of GDP and beyond.

      Obviously this is a sound, sustainable plan which soon will make Japan fabulously wealthy.

      *refills crack pipe*

      1. Clive

        They don’t want fabulous wealth. They just want to avoid financial seppuku. Now, if the Japanese could have a good old clear out of hopelessly non performing loans (I reckon they’re scarcely two thirds they way through) and quit with the mercantilism, oh, yes, and end crony capitalism corruption then it might all be a bit easier and exhibit better results. It wouldn’t hurt to stop listening to all the rubbish that the US tells them either.

        However flawed and incomplete Japan’s economic policies are, they are still way, way better than “liquidate everything”.

        1. James Levy

          And, crucially, despite what some people up the thread insist as the gospel truth, all that money printing hasn’t generated hyperinflation–in fact, the damned economy of Japan just sits there inert like the dead parrot in the Monty Python sketch.

      2. hunkerdown

        ZIRP and their shiny new TPP IP rules and their off-the-chain “Self-Defense” Forces will pay for the next baggie.

  13. Left in Wisconsin

    As one who gets the general outline of MMT, I think the post does not succeed in providing simple, straightforward answers to those naively concerned about deficits and public debt. Or rather, it does provide simple answers but I don’t see those answers convincing a skeptic. Here are my five choices for a simple answer as to why public deficits and debts are overrated as serious economic problems that don’t have to directly invoke MMT:

    1. Even a business accounts separately for current expenses and investments in the future. It is perfectly appropriate to borrow to invest as long as the future payoff on those investments is positive. (This is directly related to Clive’s excellent comment at the top.) This is why the gov’t, like private businesses, should have separate capital and operating budgets.

    2. What is much more important than total gov’t spending is what that spending is spent on. All the evidence shows that spending on education, public health (not private health insurance co profits), and direct consumption by poor people provides positive economic benefits while much defense spending and tax breaks for the wealthy do not. Also, if you want to provide jobs for the jobless and raise incomes for low-income people, the most efficient way to do that is to do it directly, not indirectly through tax breaks for corporations and providing easy money to banks.

    3. When the private economy is not providing enough good jobs to keep people out of poverty, it is the obligation of government to do it. This is why gov’t deficits have to rise when the economy is poor (higher spending on UE, job creation and anti-poverty programs) and shrink when the economy is good. If you try to shrink govt spending or balance the budget when the economy is poor, that only makes things worse.

    4. It’s the trade deficit that is killing good jobs, not gov’t deficits or debt. the trade deficit represents all the good jobs we have exported overseas.

    5. How come the government could bail out banks without crashing the economy but helping bail out ordinary people by providing decent jobs and public benefits will be disastrous?

    I realize that these are basically Keynesian arguments, not MMT arguments, except #5. But I think they are simple, straightforward, and get you to the same place.

    1. Jerry Hamrick

      Keynesian? MMT? I don’t know which is which, and I don’t care. All I know is that your arguments are all good ones.

    2. washunate

      That’s the issue, isn’t it? MMT wants to offer unique insight at a policy level, but it really doesn’t. We know that public investment in some areas is good. The issue is management doesn’t want to do that.

      1) Yep. MMT wants to say that government is special, that it’s different than a household or business. But of course it’s not; the same principles apply.

      2) Yep. MMT wants to say that deficit spending is inherently good. But the evidence shows that it matters how the money is spent. Which everybody knows. That’s why we have debates about specific programs being good or bad.

      3) This is a more controversial one. One might say government’s obligation is to provide income, not necessarily jobs. But regardless, that cyclical nature of spending is the anti-thesis of the bigger deficit spending forever perspective.

      4) Here I think you’re still stuck in mainstream economics. The problem is not foreigners at all whatsoever. The problem is entirely in the domestic economy. It’s the distribution of wages and working conditions that matters. In aggregate, there is enough ‘job goodness’ to go around. The problem is that public policy creates a labor force of tens of millions of crap jobs at the bottom in order to allow the top 20% – and especially the top 10% – of workers to reap outsized gains even as they hold many of the easiest jobs.

      5) Yep. If anything, this is the main political challenge for MMT out in the wild. Asking who should pay for the bank bailouts is one of the easiest ways to oppose them. Take that point away, and MMT is actually making it easier to bail out the banksters. I mean, that’s why everyone in Washington in a position of power is an MMTer. They love using the power of sovereign money to enrich themselves and their friends.

      1. Jonf

        I would have these comments to you:
        1. Only the government owns the money printing machine. You and I do not. That makes them different.
        2 Wars and MIC spending tend to waste resources. Nough said.
        3 When people have more income they tend to spend it and that creates jobs. A deficit means the dollars stay in the economy.
        4. I am not sure what you are saying. If u are complaining of inequality, you have landed on Bernie Sanders issue.
        5.MMT does not advocate wasting dollars or bailing out anyone. It is a matter of public policy. MMT provides the understanding to help create the policy. That u find corruption is an issue of politics.

        1. washunate

          I generally agree as well. However…

          1) No one owns ‘the’ money printing machine. What we each own (households and governments alike) is ‘a’ machine that prints promises backed by our various resources. Yes government can generate infinite fiat IOUs. But to translate that into labor performed by someone else places finite restrictions on the money printing machine. Now of course where exactly that finiteness begins depends greatly upon one’s moral views on the uses of various types of persuasion.
          2) Absolutely, but I would observe that not nearly enough is said on this front by people pushing deficit spending as a solution to our current problems. They are eerily silent when it comes to addressing bad uses of government spending. Often they do not even propose a specific budget.
          3) I’m not sure here if you are for running deficits always, or having cycles over time?
          4) This is a caution about being xenophobic. The people looting our society want average workers to blame the Chinese or Mexicans or anybody but the real culprits – other workers within the US earning outsized privileges.
          5) MMT can’t have it both ways. One can’t advocate deficit spending that can be used to enable wars and bank bailouts and then wash your hands of having laid the intellectual foundation for dismantling taxation and disarming the basic political question of who should pay for something. I agree the system is broadly corrupt. Since deficit spending offers no insight into how the money should be spent, it is irrelevant as a general proposal in said corrupt environment. Providing universal healthcare, for example, doesn’t require deficit spending, and deficit spending doesn’t guarantee universal healthcare.

      2. Left in Wisconsin

        My argument on #4 is not even really an economic argument. It is that the jobs lost via trade deficit are disproportionately manufacturing jobs, and we need more manufacturing jobs because they can, to a much greater extent than service sector jobs, provide decent incomes AND DIGNITY to poor and less educated people. One huge problem ignored by the economists that say sectors don’t matter is that everyone wants a job that allows one dignity and every working person understands in a way economists don’t that a factory or construction job is much more dignified than a counter job.

        1. hunkerdown

          The likes of Starbucks and Applebees and 7-Eleven have made them so with their psychological labor requirements. I don’t think counter jobs are inherently undignifying as long as the customer knows their rightful place as guest; the “other duties as assigned” part is what makes for the indignity.

        2. washunate

          Ah, that makes sense. I would gently suggest, however, that is rooted in a misunderstanding of work. There is nothing inherent in a factory that makes it a good place to work. Much of the great suffering of workers has happened in manufacturing.

          Rather, what made them good jobs in the American context was public policy choices.

          After all, virtually all of our cushy jobs are in the service sector, not manufacturing. No one making decent money with a PhD or MD or JD or other product of our system of higher education works a shift in a factory.

  14. Gaylord

    Future prosperity is a mirage and will only temporarily apply to the super-rich. Growth is over and done — the world economy is in the final stage of contraction and collapse due to over-consumption and population overshoot. Our industrial civilization is a heat engine that has upset the stability of the planet; now it is headed for total ecosystem and habitat destruction, and there’s no going back. We blew it. There’s no point in preparing for retirement, only for our premature death.

  15. ben

    What do we mean by “grow”? Are we talking about GDP increasing, which if velocity is held constant simply means more $$ in circulation, or are we talking about more stuff being done which makes people’s lives better?

    Why are we using a flawed concept like GDP. Can we discuss any topic with fundamentally flawed concepts or will it lead to a flawed conclusion?

  16. ben

    This seems like a really bad idea. The “must be rebalanced eventually” is a giveaway. The private banking sector of the USA is flooding the US with private debt. They can keep a gun to everyone’s head by providing unlimited credit and everyone must borrow against land to live.

    The govt then has to run down the value of savings via inflation by printing to avoid a slowdown.

    How about this: govt creates money based on wealth created and we kick the usurers out.

  17. Horatio Parker

    One thing about MMT confuses me.

    During contractionary periods, govt deficits need to be larger. OK, then during expansion, small deficits take too much money out of the private sector, and cause recession. It sounds as if govt should always run deficits.

    Or is this because of our trade deficit. If trade were balanced, during boom times could we run at small or no deficit?

    In short, under what conditions if any should the govt run at balanced or a surplus?

  18. Foy

    Finally! I’m so pleased to see someone now trying to simplify MMT debt and deficit concepts for the layman. Bill Mitchell’s blog and New Economic Perspectives blog are great for (extremely?!) MMT detailed theory but they have no hope of converting the general public.

    MMT practicioners have to convert the theory to simple concepts or phrases or even slogans (I hate that word but they work when dealing with the masses). They probably shouldn’t even have to mention the abbreviation MMT.

    A couple of years ago while ago I posted the following in Bill Mitchell’s blog when he asked how to sell MMT to the public:

    To penetrate the public psyche I think it would be very useful for MMT principles to be broken down into short basic phrases and additional short comments for each key phrase in layman’s terms that can be easily understood. The key phrase describes the principle and few additional comments help expand it. Some phrases may not necessarily be MMT specific but draw out a key MMT concept which can then be discussed. Anything complex and I think Joe Public’s eyes will soon glaze over, short and sweet phrases if possible.
    Some examples: (note some of the additional phrases below could also be key phrases)

    Key phrase:
    – A country that issues its own currency cannot go broke (and can meet all future obligations).
    Additional provisos:
    – Its currency must be floating freely
    – It must borrow in its in own currency
    – Unless it CHOOSES to default (debt ceiling)
    – A federal govt budget is not the same as your family budget – It issues its own currency – you don’t
    – If you could issue your own currency would you go and borrow it from someone else?

    Key phrase:
    – A government surplus must be someone else’s deficit. Guess whose? YOURS!
    – It’s either the private sector’s deficit (YOURS) or the foreign sector’s deficit.
    – A government deficit is the private sector’s surplus (if foreign sector flat).
    – Government debt is private sector wealth

    Key phrase:
    – The Federal Reserve was created by a stroke of congress’s pen and the same stroke can reverse it (it can be controlled by the govt).
    – The Reserve Bank (RB) is functionally part of the government from an accounting perspective.
    – The government can issue its own money
    – The govt does not need to borrow in order to spend

    Key phrase
    – The government first spends money into existence and then taxes it out of existence.
    – The government does not need to borrow in order to spend.
    – Greater Govt spending increases economic activity (demand)
    – Greater Govt taxes reduces economic activity (demand)

    Key phrase:
    – Why is govt money accepted by the public? Taxes!
    – Taxes drive money

    Key phrase
    – Government spending when there is unused capacity/resources is not inflationary
    – A government does not have a financial constraint, it has a resource constraint (do the resources exist?)

    Key phrase
    – The interest rate is a policy choice. Period.
    – The Reserve Bank uses Treasury Bills to control the short term Interest rate
    – The RB buys Tbills to lower interest rates and sells Tbills to raise rates
    – If RB wants to maintain the interest rate it is forced to provide new reserves for banks who need them for loans they have made

    Key phrase:
    – Banks create loans out of thin air, they do not need reserves to do so.
    – They acquire reserves afterwards if and when required
    – Loans create deposits

    Key Phrase
    – Quantitative Easing is not money printing, it is an asset swap
    – It is like swapping your checking account for a term deposit (bank reserves for Treasuries/RBMS)

    Key Phrase:
    – Two things must exist for Hyperinflation to occur: Civil Strife/war, Govt Borrowings in Foreign Currency
    – Zimbabwe had internal strife destroying 80% of productive capacity
    – Weimar had war reparations to be paid in gold.

    Key Phrase:
    – Unemployment is a policy choice
    – The level of unemployment is forced by the RB policy (NAIRU)
    – Currently the RB manages inflation by increasing/maintaining unemployment through interest rates.
    – A job guarantee overcomes this problem while helping control inflation

    These can obviously be greatly improved and the Job Guarantee wouldn’t be the first topic to raise! I guess this might be easier said than done but ideally there would be a whole set of short phrases (a matrix perhaps?) covering all of MMTs principles that can be used for explanation purposes or when someone throws up an opposite/neoclassical belief. Then hand out these on a small card/pamphlet ( perhaps something that could be kept in a wallet/purse) at every appropriate event, gathering, discussion presentation to local concerned citizens. Then people who are inclined to talk about it can easily show others showing interest without having to explain or remember it all.

    Something needs to break the barrier into the public psyche… Sorry for the long comment…

    1. washunate

      That’s one of the central challenges MMT has as an intellectual framework. It’s not merely an objective description of the universe that can be described in simple concepts and slogans. Everyone knows governments can deficit spend. There is no insight in that.

      MMT adds embedded assumptions and preferences that are value judgments, not universal truths. But its own proponents haven’t hammered out agreement yet on the specifics, on what the JG means, for example, so that makes it inherently difficult to come up with simple concepts and slogans.

      For example, can you summarize succinctly the wage rate, benefits, working conditions, and management of the JG program? Who picks the projects? What workers are eligible? How are workers trained and supervised? Do JG workers make less money than tenured professors and prosecutors and police chiefs? If so, what criteria is used to determine why some public employees make more money than others?

        1. washunate

          And I would counter that if one cannot offer a concise explanation of something they advocate, then one likely does not understand the idea very well. Or, one is engaging in some form of deceit, either of oneself or others.

          The details matter. Critical thinking matters. Our understanding of the world advances through testing claims, not accepting them as dogma. This is the very principle that separates the reality-based world interested in truth from the bipartisan authoritarians destroying the nation.

          As far as Keynes, he said we could work less. It’s MMTers that look at our world today and say the problem is that we humans aren’t spending enough time at work.

      1. Foy

        Agreed washunate the JG needs a lot work, those questions you ask I also wish to know the answers to and what MMT practioners think on them. It’s massive undertaking. Hence why I said I would leave the JG till last in trying to get an understanding across to Joe Public. I would start without it but I know Wray and Mitchell say it’s intrinsic as an inflation control buffer/measure.

        I would just start with simple concepts on how money actually works which is what MMT describes. Everyone should know that. The general public did once, a hundred+ years ago, they knew exactly how money works esp farmers etc, but that’s been deliberately obscured for a long time now and the general public knowledge has been lost.

        1. washunate

          Yeah, that’s the challenge. Wray and Mosler put full employment as the key MMT Insight. I appreciate that directness and the authenticity of that as a moral calling. But the details are incredibly complex. Examining them calls upon business administration and political science skills and experience with how the real world actually works that academic economists don’t appear very enthused to engage.

          So some other commentators have been using MMT ideas to push deficit spending as the primary concern. But the problem with that is you lose the moral calling of a particular program, ending up with vague platitudes about spending money and aggregate demand without any guiding principles or answers to the basic questions of ‘why’ or ‘how much’. It’s especially difficult since MMT is sold as change yet deficit spending is what we’ve been doing, so even that simple framework doesn’t hold.

          I would push back some on the notion of the public not understanding being the problem. There is a very self-serving element in comfortable intellectuals blaming the unwashed masses for a system that benefits those intellectuals while preying upon the general public. It’s one of the reasons MMTers can’t decide on the details. Everyone is happy for Other People to be hired by the JG program, so long as their own jobs enjoy better pay and prestige.

          1. Foy

            I must admit I’m using anecdotal evidence on the public not understanding how money works. None of my friends (and many are chartered accountants CFO level) know that loans create deposits. They believe that banks collect deposits and lend them out ie loanable funds model but rarely have they ever thought about it. Hardly anyone I’ve ever spoken to informally on this topic ever knows that loans create deposits.

            But my reading of history in times of recession/depression/banks runs etc it’s seems a lot more blue collar people back then had an understanding of how banks create money that is better than my white collar friends today!

          2. Foy

            And I agree that the challenge is making sure the spending is appropriately directed. That is obviously easier said than done. I would say that the deficit spending to date has been poorly directed. But saying that the govt should run a surplus which is what the status quo is now, when it is not appropriate and is used to justify a lot of unnecessary human misery is also a framework that doesn’t hold.

            MMT just describes the tool. How it is used is the kettle of fish for discussion. But the understanding of the tool should happen first.

            1. washunate

              I would say that the deficit spending to date has been poorly directed.

              As a method of communicating, acknowledging that reality first would be very helpful. But most of the writers who have been pushing deficit spending over the last few years refuse to acknowledge that condition(!), nevermind exploring why. It’s an arrogance and lack of awareness that may work in preaching to the choir, but it doesn’t convince anyone who has a different perspective. In fact, it makes the framework sound either childish or actively supportive of the status quo.

              Most Americans alive today have no memory of the gold standard and other monetary constraints. Heck, never mind gold, almost half of the American population today was born after copper was removed from pennies.

              Fiat money being used for running federal deficits is all Xers and Millennials know. And even Boomers have now experienced deficit spending for all of their adult lives.

              1. Foy

                Agreed, communication is everything in making change happen. Talking to the choir doesn’t help matters at all. From what you say it seems clear they haven’t described well enough how and where the deficit spending has been very poorly directed in recent times. It’s good to know that. They need to fix that impression.

                I know that it’s been mentioned by some that public infrastructure is breaking down and that defense spending has programs that soak up ridiculous amounts of money for little benefit and are extremely difficult to halt. Congress attaches a huge number of earmarks that have little to do with the law being passed are another source of spending that often has dubious benefit – which is often driven by campaign finance donations and interest. There’s lots more examples. I wonder what the Koch brothers want in return for their $1billion they are spending this election. I’m sure it’s not just a game of golf with the President once a year!

                I think deficit spending and controlling its direction are issues that are separate but intertwined, like siamese twins joined at the hip. They directly affect each other. Each has to be understood separately to start with and then work out how they should be implemented. The challenges are huge on both issues. Can it be done, I don’t know the entrenched interests and inertia is massive. It’s difficult but I’m not sure that should stop us trying.

                Thanks for the great discussion washunate!

                1. washunate

                  See you around! In many ways, this is the discussion the collective we has been having for quite a long time, which I think is part of why the general public is outright hostile and dismissive of the whole economics profession at this point.

                  So much vague talk and sermonizing, so little in the way of actionable principles and concrete mechanisms to restore checks and balances in our system.

          3. Foy

            And unfortunately I don’t think MMT can address the bigger problem which is requirement for exponential 3% economic growth in a finite world. After all governments are resource constrained not financially constrained. Sooner or later the irresistible force will meet the immovable object and MMT wont fix that.

            In fact I think that some of the problems being seen now are a result of ever scarcer resources and increasing energy extraction costs compared to those costs back in the 1920’s to the 70s, But that’s a whole another issue!

  19. Tim

    All the arguing over MMT shows that it is not The lack of MMT implementation or too much deficit spending that is the problem. it is that the expenditures beyond the income is NEVER spent by Representatives of the people’s money “to do things that should be done” per Yves words. All the low interest rates and quantitative easing are all the closer we got to MMT in a crisis, what about when times are good?

    Communism is darn near Utopia, heck the early Christian Church operated this way when bamboozled by selflessness , but nobody wants it having seen when implemented with real humans on a large scale.

    I see MMT the same way. It’s an excellent theory but in practice it is ruined because it is managed by people who are corrupt, foolish, incompetent…etc, without necessary accountability.

    If we put IBM’s Watson computer in charge of all deficit spending MMT would work, but until then, no dice.

    The person that wants no deficit spending (anti-MMT) has the best argument, because at least when you can put boundaries on expenditures you limit the corruption from getting out of hand, and the un-corrupt will work harder to ensure the money is spent in the most efficient manner possible.

    1. hunkerdown

      Corruption is an orthgonal problem and can be solved concurrently, as soon as we stop recognizing the right to rule.

  20. Foy

    I think the WordPress moderation monster might have swallowed my longer than usual comment of a couple of hours ago. Maybe he’s got digestion issues at the moment!

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